Two Common Ways You Overpay With Sales Compensation
August 16, 2017
This is a common complaint I hear from CEO’s. At some point during the year they finally realize just how much they are paying their bottom performers and just how little sales these reps are closing. This mismatch in pay for performance is related to two underlying problems in the sales compensation plan structure.
To understand this problem better, first you must define what underperformance means to you. Is it 50% of quota, 60% of quota, 75% of quota.
Problem #1 – Base pay is set too high for the job role.
I have defined underperformance in these examples to be 50% of quota. Both Sales Compensation Plan A and B are designed both to payout $100,000 Target Total Compensation (TTC) when the sales rep reaches 100% of their quota. TTC is base salary plus incentive which is indicated by the red horizontal line on the graphs below. Plan A has a high base pay of $70,000 or a 70/30 plan, 70% base salary and 30% incentive. Plan B has a more reasonable base pay of $50,000 or a 50/50 plan. Because of the high base, Plan A is paying $85,000 to a sales rep that is performing at 50% of their goal. Plan B is paying $75,000 to this underperformer and more of that payment is tied to incentive vs the guaranteed amount of a base salary.
Problem #2 – Flat commission rates
Working with the same underperformance level at 50% of quota, I have created 2 plans. Sales Compensation Plan C is a flat commission rate plan, which means the commission rate remains the same regardless of the volume of sales. Sales Compensation Plan D has a ramped commission rate and a quarterly attainment bonus. The ramped commission rate changes with attainment of quota and the attainment bonus reinforces the importance of being at goal each quarter that kicks in when the year-to-date quota is achieved each quarter.
I can say without a doubt, Plan C, the flat commission rate plan will pay too much for underperformers and too little for excellent sales rep. The base pay is the same in both plans. At 50% of goal, the sales rep that is on Plan C will earn $75,000. That same attainment level on Plan D, the ramped rate plan will only pay the sales rep $60,000. Would you rather pay $75k or $60k to a rep that is only 50% of their goal?
How you attract and retain top performers is directly related to the amount these top performers will earn on the plan. These top performers always see themselves reaching above quota. For this example I used 120% of quota for excellence. In Plan C, the top performer will only earn $110,000 which is $35,000 more for a 70 point improvement in performance. In Plan D, the top performer will earn $124,000, which is $64,000 more for the 70 points performance improvement.
Flat rate sales compensation plans tend to encourage the poorer performers to stay while the top will migrate to companies who pay well for excellence. What is your choice?